This twist on selling pensions targets vets

Decorated military men solemnly salute. “Take control,” say the words beside the photo. “Eliminate debt. Launch a business. Fund college tuition.... Take a dream vacation.... You choose. You control.”

And so Huntington Beach-based Pension Funding LLC, one of several companies nationwide pitching “pension advances” to veterans and other retirees, reels them in online.

“Did you know you can trade your monthly pension payments for lump sum cash? Existing pension funds can be a viable option, and many military pensioners are seeking pension advice from Pension Funding LLC.”

What company web sites do not mention: That a class-action lawsuit in California resulted in a $3 million judgment, and the conclusion that pension advances for military retirees who had enlisted are “prohibited,” “unenforceable” and “unlawful.”

They also do not mention that the Federal Trade Commission has warned consumers off pension advances because they come at a very steep price; that the U.S. Government Accountability Office found that what’s owed can be double what was received; and that such companies are in the cross-hairs of crackdowns in New York, Massachusetts, Washington, Vermont and Missouri, and, perhaps soon, by the federal government as well.

“These pension advances appear to be nothing more than payday loans in sheep’s clothing,” said New York’s Benjamin M. Lawsky, superintendent of financial services, when the Empire State launched an investigation last year. “Pension harvesting schemes that hit financially strapped retirees with sky-high interest rates and hidden fees are simply unacceptable. It’s especially disturbing that military veterans – who earned their pensions defending our country – are apparently being targeted through these abusive products.”

New York sent subpoenas to 10 companies – including Huntington Beach’s Pension Funding LLC and Pension Income LLC, and Irvine’s LumpSum Pension Advance and Pensions Annuities & Settlements LLC – to see if they engaged in fraud or violated laws prohibiting the harvesting of military pensions.

In May, Washington state charged two Orange County companies with making loans without a license: Huntington Beach’s Pension Funding LLC, and Irvine’s Pensions, Annuities and Settlements, LLC.

“These companies are targeting some of our most vulnerable citizens, including elderly and disabled pensioners,” said Scott Jarvis, director of Washington state’s Department of Financial Institutions, in a prepared statement. “It is critical that the financial products and services offered to them be in compliance with the law.”

California is believed to be the epicenter of this universe. An investigation by the GAO released last week found that nearly half of the companies probed – 18 of 38 – hail from the Golden State. Many appear to be related to one another, the GAO found, and had effective interest rates up to 90 percent.

Despite red flags and warning bells – and the fact that California has 1.7 million veterans, more than any other state – not much official consumer action is under way here on the pension advance front.

Should there be more?

Washington’s financial analysts did the crucial calculations for 90 different advance transactions that the companies, and the retirees, did not do themselves. Using initials here’s several examples: Retiree S.V.’s $3,400 advance would end up costing $18,600, says Washington’s statement of charges against the Irvine company. Retiree R.C.’s $4,700 advance would cost $30,600. M.R.’s $30,000 advance would cost $89,827.

“I don’t know what California’s law is in regard to the definition of a loan, and we can’t say we want California to take action,” said Deborah Bortner, consumer services director for Washington’s DFI. “But it’s always good to have the home state take some responsibility if they have the statutory authority, because it’s right there in their own back yard.”

NOT A LOAN

The Register left phone messages, voice-mails and emails with each local pension-advance company, but only heard back from Rex Hofelter, of Huntington Beach’s Pension Funding LLC, who is all for firmer regulation.

Not all pension-advance firms are the same, he said. His company spoke with the GAO during its probe, and he’s as alarmed as anyone to hear of retired vets agreeing to repay so much more than they were advanced. “There are companies out there going crazy and giving our industry a bad name,” Hofelter said. “I’d love for it to be regulated, for everyone to be on the same page.”

What might that regulation might look like? Like how his company conducts business. “If it was regulated to do it the way we do it – 100 percent very transparent,” Hofelter said. “Every pensioner 100 percent knows every penny what the cost is.”

When we asked if interest rates are called out in his company’s agreements with pensioners, Hofelter said no. “Interest rates are for loans,” he said, “and these are not loans.”

So what are pension advances? They are “purchase and sale agreements,” or “annuity utilization agreements,” or “cash advances,” or “buyouts of a stream of income,” according to various court and company documents.

But they are not loans. And since they are not loans, they are not bound by laws governing lending, such as maximum interest rates, loan disclosure requirements.

Here’s how Hofelter’s Pension Funding LLC explains it online: “You are not borrowing against your pension. You are the owner of the pension asset. And you can turn it into a working asset by selling a portion of it. It’s like trading one asset (a certain number of your future pension payments) for another asset (lump sum cash amount)....

“Some refer to a loan against pension, but it’s not. It works as an advance, not a loan, because you actually sell your pension payments to our income buyers. Our income buyers purchase typically an eight-year portion of your overall pension payments and provide you with a cash advance (lump sum).”

Washington state’s position is that if it walks like a duck and talks like a duck, it’s a duck. But whether pension advances are actually loans, and should be bound by lending laws, “is a long-standing unsettled question,” said the GAO.

“We identified questionable practices associated with pension advances that currently have little, if any, oversight,” GAO said. “Questionable practices that we identified included: (1) the lack of disclosure of terms and company identity as well as (2) certain unfavorable terms of agreement.”

Next: Details on the class-action lawsuit against an O.C. pension advance company that resulted in the $3 million judgment, as well as what other states are doing.

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